Not all robots are created equal. Make sure you understand the difference.

My nightmare? Being awakened by a weirdly built biped with shining eyeballs and dressed in business attire, closing in on my face and hissing metallically: “What did you say your asset allocation was?”

“How about my slippers first?”

Despite recent press chatter on potential job losses and other imminent catastrophes due to the advancement of “robotization”, not everything is really new under the sun. Automation has been with us in production lines, lawn-mowers, surgical procedures, cruise control, and timing devices everywhere. However, a real feeling of unease begins to percolate when we perceive our brain – as opposed to our body – is being hijacked, even though here too we’ve been moving in this direction for decades: automatic GPS routing, video games, voice-operated customer support, auto-correct features in word processors and their offspring.

In the field of asset management there are at least two types of robotized phenomena. One is the so called robo-advisor. I’ve come to appreciate the concept so much that I actually have invested in (and with) one. The way they approach the needs of investors, especially young ones, by simplifying analytical considerations and helping strengthen their discipline is admirable. Typically, robo-advisors offer

  1. low cost, sometimes free, implementation;
  2. minimal initial investment;
  3. operational transparency and simplicity;
  4. standard asset allocation analyses;
  5. assistance in implementing and scheduling savings plans (automatic deposits);
  6. rebalancing;
  7. accessibility from the web and apps.

These are all important components of investing, especially for newcomers or less experienced individuals. One robo-advisor even helps in building a schedule of targets and objectives, and provides reminders and periodic updates for following progress in implementing individual investment plans.
   Are robo-advisors without risks? Probably not, but no more or less than any other traditional provider of investment services. Do they save you money and time? Absolutely.

While robo-advisors help to democratize access to investing and bring down costs, automation can also be used for more dubious purposes: to build ever more complex products whose high fees should be the vestige of times past. A few years ago hedge-fund index notes were born, taking in hundreds of millions of dollars of investors’ money. The notes offer investors, via complex replication techniques, the returns of popular hedge-fund indices, with the additional benefit of more liquidity.
   For their trouble the promoters of these notes charge around 1% p.a. Part of the success of this product is attributable to a misconception, further legitimized by some ill-thought press coverage: 1% for hedge-fund returns sounds way less than the typical 2%/20% fee schedule, until you realize that an index of hedge-funds is built using net returns. Hence, the notes offer those same returns at an additional 1%.
   Is the added liquidity worth the extra cost? Perhaps, but realize that selling those notes is certainly no run-of-the-mill trade, with underlying components to be priced at the whim of the promoter.

Big difference between the mundane (almost boring) robo-advisor offering and the more exciting (but dangerous) hedge-fund index notes.

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